President Trump's Tax Returns: What Can They Really Tell Us?

Sometime in the past few days, the first two pages of President Trump's 2005 Form 1040 mysteriously landed in the mailbox of Pulitzer Prize-winning journalist and tax professor David Cay Johnston.

Johnston shared the documents with Rachel Maddow and MSNBC, setting off BREAKING NEWS sirens that inspired millions of Americans to flip on the TV to watch Maddow unveil the President's intimate -- and private -- financial information.

Now normally, the opportunity to ogle the President's tax returns would not create a stir; after all, every sitting president since Nixon has published their returns as part of an unwritten agreement with the American people to be transparent and forthright. President Trump, quite famously, has deviated from that long-held practice, first refusing to release his returns during his campaign because he was "under constant IRS audit," and then pointing to his subsequent election as a referendum that "no one other than journalists" cares about his taxes.

Of course, people DO care: over 1 million individuals signed an online petition insisting that Trump publish the missing returns, but to date, the President has resisted. This of course, has only added to the intrigue, and in today's world, when there's enough intrigue, there will eventually be a leak.

And that's how we ended up glued to our TVs last night, hanging on Maddow's every word with a sense of collective voyeuristic anticipation unseen since Geraldo unearthed Al Capone's vault. And just like Geraldo's gaffe decades ago, Maddow's big reveal would actually reveal...nothing at all.

To listen to Maddow's introduction, one would think that Trump's return would neatly lay out his Russian connections, abusive tax shelters, and the fate of Atlantis. But that's not how tax returns work. Even a basic return only reveals limited useful information, and as a general rule, the more complex the return grows, the less transparency it offers.

Maddow's opening riff set the table for all of the things the President's tax returns could ultimately reveal about his holdings, relationships, and obligations. Yet the 2005 return obtained by Johnston and MSNBC did none of those things.

Why not?

Let's take a look at the claims laid out by Maddow, and then get an understanding of which are true and which are simply wishful thinking.

Claim: Trump's return would reveal the nature of his charitable contributions.

Reality: It would, but only if we got a complete return.

Understand this, a tax return can be comprised of a near-infinite universe of schedules, attachments, and elections. And without all of them, you simply don't get a complete picture. The 2005 return obtained by MSNBC was limited to the first two pages of From 1040. A taxpayer's charitable contributions, however, are detailed on Schedule A, which lists out a taxpayer's "itemized deductions."

We can see from Trump's 2005 return that he claimed $17 million in itemized deductions, but without Schedule A, we get no indication of what makes up those deductions. Now, given that Trump was a NYC resident, it is very likely that the majority of the $17 million in itemized deductions was his state and city tax burden, because Trump had $150 million of federal taxable income (before net operating loss), and NY has one of the highest state tax rates in the U.S., before taking into consideration the NYC piece. But that's simply guesswork. The fact is, for anyone's tax return to be illuminating, we need to see everything. Quite frankly, once Maddow and MSNBC learned they only had two pages, they should have dialed back the "Trump's Watergate" motif a tad.

Claim: President Trump bought a home in Florida for $40 million and sold it less than four years later to a Russian oligarch for nearly $100 million. The Trump tax return would reveal whether Trump made enough improvements to the house to justify the huge increase in purchase price, or whether the large premium paid by the buyer represented a nefarious relationship between Trump and the Russians.

Reality: Sort of.

If the home was used as a vacation residence rather than a rental property, Trump would have had no obligation to report the cost of any improvements made to the residence anywhere on his Form 1040. If the property were rented out, yes, Trump would likely attach a depreciation schedule to his return showing the cost and resulting depreciation deductions related to any improvements, but if the property were simply a residence, any records of improvements would simply be retained by Trump and used to compute gain or loss on the subsequent sale.

If, however, we could get our hands on the return for the year of sale; well, that could be interesting. The Schedule D would show the $100 million sales price, as well as Trump's "basis" in the home, which would be comprised of the $40 million purchase price plus any improvements. If the total basis remained anywhere close to $40 million -- or anything less than $100 million, really, given the real estate market in Florida when the property was sold in 2009 -- it would definitely raise questions about why a Russian investor would be willing to pay $100 million for property that was purchased only four short years prior for $40 million during a time of declining values.

But here's the thing: owing once again to the inverse relationship between tax return complexity and transparency, the return for the year of sale would only prove useful if Trump owned the residence in his individual capacity; which is exceedingly unlikely. It is much more likely that it was owned through a trust or multi-member partnership, which means that his return would not reveal the detailed determination of his gain or loss on the sale; rather, its presentation would be reduced to a single line-item on Schedule E, showing his share of the gain or loss from the trust or partnership. Stated in another way, by simply owning the home through a separate legal entity, Trump would "remove" the home's presentation from his Form 1040 and move it to that other entity. And neither Trump nor any president before him has been obligated to publish the tax returns of the entities in which he owns an interest.

And this, ultimately, is the primary reason Trump's returns, even if published in full, would fail to prove enlightening. The majority of his activity is surely found in separate partnerships, trusts, and S corporations, his share of which would be simply reduced to a few numbers and presented on his return with limited detail; the larger, more revealing information safely secluded on the tax return of the actual enterprise.

Claim: President Trump's foreign ties will be revealed through his "foreign tax credit."

Reality: Yes, but...

If you earn income in a foreign country, you pay tax to that country. Because you are a U.S. citizen, however, you pay tax on that income here as well, even though it was earned overseas. To prevent double taxation of the same income, the tax law allows you to take a tax credit against your U.S. taxes for the amount you paid to the foreign country. To illustrate, if you earn $100 of dividends from Ireland and pay a $10 foreign tax, when you file your Form 1040, if you pay U.S. tax of $25 on the dividend income, you get to take a $10 credit for the tax paid to Ireland, reducing your U.S. tax to $15.

So yes, if Trump is invested in foreign bank accounts or dividend-paying businesses, it would be revealed through the presence of a foreign tax credit. And Trump's 2005 return did in fact reveal $23,000 of foreign tax credits.

But guess what? ALL of my individual clients have foreign tax credits, some in excess of Trump's $23,000. In fact, on Hillary Clinton's 2013 tax return, she claimed a foreign tax credit of $100,000. Does that mean she has four times the foreign ties of Donald Trump?

No, of course not. There are countless reasons a taxpayer -- whether a sitting U.S. president or CEO at the cracker factory -- would have foreign investments, resulting in a foreign tax credit. The presence or magnitude of such a credit will tell us nothing about the nature of those foreign relationships, which is ultimately what everyone really wants to learn about President Trump. As I've said, I've got plenty of clients with over $23,000 in annual foreign tax credits, and to the best of my knowledge, they are not in bed with the Russians.

Interestingly, even the absence of a foreign tax credit would not conclusively dismiss any Russian ties for Donald Trump, because there are plenty of relationships Trump could have with foreign parties that would not give rise to a foreign tax liability -- such as if Trump were a borrower rather than an investor -- that would still leave him in a compromised position.

Claim: President Trump's tax return will reveal whether he was truly under continuous audit, as he claimed.

Reality: False.

Unless the IRS has gotten into the habit of slapping a big red "AUDITED" stamp on returns it examines, President Trump's 1040s will tell us nothing about whether they were subject to IRS scrutiny.

Claim: President Trump's tax return will reveal how much he owes to foreign lenders.

Reality: Highly unlikely.

Individual returns do not contain a balance sheet similar to business returns, and thus the principal balance of any amounts owed to foreign lenders would not be reflected. And yes, while an individual can deduct interest expense in limited scenarios, any interest the President is paying to foreign lenders is most assuredly business interest, and would be deducted on the separately filed business returns. Of course, that interest expense would flow through to Trump's return, but in all likelihood, it would be combined with the other business activity of the venture and simply lumped into one line-item on the return, revealing nothing.

Claim: President Trump's return will reveal whether he has a business relationship with the Turkish government, which may answer some of the unanswered questions surrounding Michael Flynn's firing.

Reality: Sorry, but once again, Trump's business partners would only be revealed if we got our hands on the business tax returns, which no president is obligated to publish.

While we may see the income allocable to the Turkish business reflected on his individual return, we would 1) not see the other investors, and 2) have no idea that the income was in fact allocable to the Turkish activity unless the business was named something like, oh, I don't know...Illegal Turkey Holdings Co. Unfortunately, however, knowing President Trump, it's much more likely that the name will be something far more mundane and self-congratulatory, yet far less revealing, like MAGA Inc.

Claim: President Trump's return will reveal whether he lied on his financial disclosures; some have accused him of claiming "wildly inflated" values for many properties that he also said were "losing money" on tax filings in the U.K.

Reality: Herein lies the biggest problem with tax returns as a source of enlightening information. It is entirely possible -- likely, even -- that Trump's properties and investments BOTH 1) have a high value, and 2) generate significant tax losses.

Value and income do not move in lock-step. Generous depreciation rules mean that brand new, highly valuable buildings can generate substantial tax losses. Countless other tax incentives do the same. And this, ultimately, places Trump in a no-win situation should he publish his tax returns. If the returns show substantial income and even greater complexity, critics will attack him as they did Mitt Romney, decrying the lack of transparency and questioning the sources of his income. And, of course, any tax proposal posited by the President will be scrutinized and quantified to measure how he would benefit, resulting in endless headlines pointing out his self-interest.

Then there's the other possibility: that Trump's returns for most years OTHER than 2005 would reveal large losses. After all, that year was the heyday of The Apprentice, and we've already seen that Trump's 1995 federal return appeared to reflect a $900 million net loss. What if all years between '95 and 2005, and most years since, reflect tax losses? In that case, he'll be accused of 1) not paying his "fair share" by improperly avoiding taxes -- as it was agued when he generated the loss in 1995, despite absolutely no evidence that it was earned through improper means, or 2) met with suggestions that he is not the successful businessman he claims to be, even though the point of the tax "game" is to own valuable properties that generate tax losses. I've got plenty of clients who are able to reach that financial nirvana through entirely legitimate means, and it's entirely likely that Trump has been able to do the same.

If that's the case, however -- should he in fact have tax losses year after year -- it gives us no additional certainty that he's a bad businessman. Or that he abuses the tax law. Or that he overstated values on his financial filings. Just as his returns will tell us nothing about whether he borrowed from the Russians or built with the Turkish government. That's just not what tax returns do. Maddow and MSNBC should have been a bit more aware of that fact.

None of this, however, means that President Trump shouldn't publish his tax returns. Viewed simplistically, there is no compelling reason not to unless he doesn't want us to see them. The "audit argument" doesn't hold true. Nor does the "people don't care" defense. It's like this: if my wife asks to read my text messages, I may prefer to not let her. That's my business after all. But if I tell her, "not a chance," she can only logically reach one conclusion: there's something on there I don't want her to see. And you know what?